Friday, April 1, 2011

“Just the facts” Friday: Are U.S. Corporate Tax Rates High?

The fact that G.E. didn’t pay any U.S. income tax last year, in spite of earning $14 billion (a third of that from U.S. operations) has put the issue of corporate taxes in the spotlight. (The company did pay $1 billion in other federal, state and local taxes in the U.S.) The resulting debate is predictable: calls from the left to force corporations to pay more (or any) taxes, and from the right to lower corporate taxes to spur economic growth.

But what is the truth? Are U.S. corporate taxes really as high as the right would have you believe? And are as many corporations avoiding them as the left claims? Let’s cut through the b.s. and look at the facts.

The U.S. Corporate Tax Rate IS High…

Compared to other OECD countries (see here), the U.S. does have the second highest corporate tax rate (including available statutory adjustments and an average for state/local taxes) at a combined 39.21%. This is the figure oft-quoted by conservatives. Only Japan (39.54%) has a higher rate. At the bottom of the heap is Ireland at 12.50%. Canada is 10th highest with 29.52%, a lower federal rate compensated for by higher provincial taxation.

Of course, we’re not just competing with OECD countries (the most advanced economies) but China, India, Brazil and other rising stars. How do our rates compare to those countries? China’s corporate income tax rate is 25%; India’s is 33.2175%; Brazil’s is 34%. (Of course, hands in the air anyone who thinks companies actually pay these rates in these countries, which tend to be less than … err … transparent.)

…But We Don’t Have a Value-Added Tax

One factor that gets ignored in the debate is the fact that, alone among major countries, the U.S. has no value-added tax (VAT). Unlike a consumption (i.e. sales) tax that’s paid only by the end consumer, VATs are collected at every stage of the process. So companies pay this tax when they buy supplies, components, raw materials, services, etc., and those companies, in turn, pay for everything they buy.

…We’re Ignoring Actual Tax Rates

When all is said and done, companies are not paying 39%. According to the Treasury Department, it’s actually 27%. There are significant variations within that, as this report from Business Week demonstrates. To quote:

"The result is a list of players whose tax burdens ranged widely, from essentially nothing to almost 400% of pretax income a year. Troubled industries with weakening profits had the highest tax rates: The auto sector averaged 45.5%, banks paid 50.3%, and real estate companies paid 66.1%. The least-taxed industries were semiconductors, at 19.6%, often because of high expenses in the U.S. and high overseas income. Infrastructure investments helped to keep telecoms at a low 22.2%."

And the Government Accounting Office reported that 57% of U.S. corporations paid no tax at all for at least one year between 1998 and 2005. Of course…

… Corporate Taxes Are Often Low For Legitimate and/or Legal Reasons

What many of the stories and rhetoric about corporations that don’t pay taxes, or pay at a lower rate, don’t mention or downplay is that most of these companies are using legal means to lower their U.S. tax payments. They’re using depreciation for capital equipment, transfer pricing agreements with foreign subsidiaries, research and development credits, and many other tools to reduce their U.S. tax liability. We might call these “loopholes,” and we may find it ethically distasteful, but it’s generally legal (an outgrowth of policies designed to promote economic growth and for other political reasons), and it would be a foolish company that didn’t seek to lower its taxes. Whether these are the right policies or not is an entirely separate issue.

… It’s Low as a Percentage of GDP

According to the Tax Policy Center, U.S. corporate income taxes as a percentage of GDP are about as low as they’ve ever been, at 1.3% in 2010. Going back to 2006 and 2007, when the economy was good, it was still only 2.7%, slightly higher than it was in the 1980s and 1990s, but lower than it had been before that.

We’re also generally lower than other countries, according to the OECD (note that the data is from the relatively high tax year of 2006).  The average was 3.9%, and the U.S. was at 3.3% (the OECD calculates this differently from the above).

…and Finally, It’s Declined as a Percentage of Taxes Collected

The percentage of federal government tax revenue derived from the corporate income tax has declined from well over 20% to around 12%, as this graphic demonstrates.

The Bottom Line

The “second highest corporate tax rate in the world” is misleading at best. But slamming companies for taking advantage of available legal means to reduce their taxes isn’t any more helpful.

Basically we have a highly interlinked global economy, and a very complicated U.S. tax system. Reducing the issue of corporate taxation to soundbites serves no one. It’s complex, and part of a much broader discussion about fiscal policy, taxation, incentives, economic competitiveness, and globalization. Given the rigid ideological positions and lack of public understanding of these issues, I don’t harbor a lot of hope for enlightened and thoughtful discussion about this topic.


  1. Very interesting. Now what about taxing the wealthiest people rather more. Does that make sense?

  2. That gets into the realm of policy, rather than pure fact! I am going to do a post on taxation in the U.S., i.e. where the money comes from, who's paying, what percentage it makes up of GDP, income, etc. Deciding how that should be allocated is a whole area of debate!